Assessing China's Residential Real Estate Market

China's real estate market rebounded sharply after a temporary slowdown in 2014-2015.This paper uses city-level data to estimate the range of house price overvaluation acrosscity-tiers and assesses the main risks of a sharp housing market slowdown. If house pricesrise further beyond 'fundamental' levels and the bubble expands to smaller cities, itwould increase the likelihood and costs of a sharp correction, which would weakengrowth, undermine financial stability, reduce local government spending room, and spurcapital outflows. Empirical analysis suggests that the increasing intensity of macroprudentialpolicies tailored to local conditions is appropriate. The government shouldexpand its toolkit to include additional macroprudential measures and push forwardreforms to address the fundamental imbalances in the residential housing market